Massachusetts Channel Partners Struggling With Services Tax Proposal

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Channel partners in Massachusetts are concerned that a proposed tax on IT services will interrupt the commonwealth's economic recovery, drive business across the border and add a thick layer of complexity across future transactions.

If it becomes law, the proposed tax would impose a 4.5 percent levy against a wide variety of business-to-business IT services, and it would generate an estimated $265 million in revenue.

"This really frosts me," said Mont Phelps, CEO of NWN Corporation, a Boston-based channel partner. "IT is part of the solution, not part of the problem. They want to take money out of this industry to show that they can."

According to a document from the Massachusetts Department of Revenue, targeted IT and data processing services would likely include services around code development, modification or testing of existing programs, feasibility studies, the design and installation of computer systems that integrate computer hardware, software and communication technologies, disaster recovery, and similar functions.

Momchil "Memo" Michailov, co-founder and CEO of Waltham, Mass.-based data management and protection software vendor Sanbolic, called the new tax "ridiculous" because of the potential to drive part of the IT industry out of the state.

Michailov said he is far from being an anti-tax person, noting that he appreciates government services such as funding the schools where his three children study or building and maintaining the roads he and his colleagues use.

However, he said, the new IT services tax, like the upcoming Internet sales tax scheduled to go into effect in November, are obvious plays by the State of Massachusetts to tax businesses while not taxing individual consumers.

Because of Amazon's acquisition of a Massachusetts-based data robotics company Kiva, sales of Amazon's products and services will be subject to tax. However, he said, there are exceptions for music, videos and the Kindle.

"If they charged taxes on everything, users would be up in arms," he said. "These are very 'loop-holish' taxes. The state is not taxing users for Internet service, even though most bandwidth is used for users' pictures and videos."

The proposed IT services tax, coming on top of the Internet sales tax and a host of other taxes Massachusetts has recently implemented, make doing business in the state complicated, Michailov said.

"Our customers and partners are staring at the computer screen wondering what will happen," he said. "The advantage of the cloud is, people can run a lot of applications efficiently, but it's hard to know where the data and services are."

As an example, Michailov said his 20 GB of email in the cloud would be hard to define for tax purposes.

"How would you tax it?" he said. "I access it from the office, from home and from mobile devices. Data does not sit in one device. It's moving. I have data, pictures and videos. What is the impact? The new tax is not designed to impact consumers. But, I have to figure out how the State of Massachusetts will skim off another 4.5 percent of my business."

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